LONDON: Sterling fell against the dollar on Tuesday as the US currency rebounded from recent lows, while traders said they were looking to crucial British earnings data due later this week that could help cement bets the central bank will hike rates in May.
Bank of England Governor Mark Carney earlier this month said interest rates needed to rise a bit faster and more than previously expected, and the market now prices in a roughly 80 percent chance of a May hike.
Analysts said the May hike was largely priced into the pound, which is up 3.4 percent against the dollar this year, and for sterling to rally further there would need to be more clarity over Britain's departure from the European Union, or expectations of more rate hikes.
"We would need to see a significant negative [earnings data] miss to see the market reprice the chances of a May hike," Morten Helt, a strategist at Danske Bank in Copenhagan, said, referring to data due on Wednesday.
The data is seen as crucial because the BoE has said it signalled that it needs to see rises in wage pressures before it starts to raise rates.
Carney is due to speak to a British parliamentary committee on Tuesday, but analysts said they expected him to stick to the line given earlier in the month as the market had already moved to price in a hike in May.
Helt said he thought the market was underpricing the chances of further rate hikes over the next two years, but it would take time for those expectations to adjust and to be reflected in sterling.
The pound fell 0.3 percent against the dollar to trade at $1.3953 at 0925 GMT. Sterling in January hit its highest level, at $1.4346, since the vote to leave the EU in June, 2016.
Against the euro, the pound was up marginally at 88.495 pence per euro.
Traders will be looking to an EU leaders meeting next month for progress on Britain securing itself a transition deal for when it leaves the EU.
"Shifting opinion polls regarding the merits of Brexit keep a carrot in front of the noses of sterling bulls, because there's no doubt that any genuine hope of a soft or non-existent Brexit would be good for the currency," Societe Generale said.
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